How South Africa will tackle cryptocurrency regulation

The Intergovernmental Fintech Working Group (IFWG) has released a report on its first market outreach workshop, hosted in April 2018.

The workshop allowed South African regulators to engage with the local cryptocurrency industry and outline a strategy for efficient regulation.

The IFWG comprises members from National Treasury, the South African Reserve Bank, the Financial Sector Conduct Authority, and the Financial Intelligence Centre.

A major segment of the workshop was devoted to the rapidly-evolving cryptocurrency industry in South Africa, and aimed to give regulators insight into emerging use cases.

Regulators also sought information from industry players regarding the role of exchanges and the proliferation of initial coin offerings (ICOs).

Criminal risks

The IFWG report stated that most digital tokens in South Africa tended to be either payment or utility tokens, acting as a digital currency or as a way to access a future company’s product or service.

The report also differentiated ICOs from IPOs by clarifying that the former are not required to comply with standard documentation or be subject to third-party due diligence.

Prominent South African ICOs include Newtown Partners and ProsperiProp, it stated.

The IFWG also noted that cryptocurrencies could be used to conduct money laundering and avoid transaction monitoring.

“As activity in cryptocurrency trading is increasing, so is the risk of exploiting these instruments for ambiguous or illegal purposes,” stated the report.

Regulators stated that the inability to control these transfers or make them subject to know-your-customer requirements was concerning.

“The recovery or interdict of an illicit financial outflow are impossible, exacerbated by the fact that cryptocurrencies are expedient in transmitting value across national borders, free from government intervention or exchange control regulations.”

However, industry bodies reminded the regulators that potential risk for cryptocurrencies to be used to bankroll illegal actions was far smaller than that of physical cash.

Digital currency exchange Luno told regulators that the implementation of regulation was required in order to provide companies with more clarity and allow for improved security standards.

Core issues

The report defined a number of core issues which regulators must consider when moving forward with the regulation of the cryptocurrency industry.

Firstly, regulators must implement a plan to deal with the classification of cryptocurrencies and digital tokens – as these can perform a multitude of functions.

The report also stated that major risks in the cryptocurrency space should be identified and dealt with, such as the lack of customer authentication and anti-money laundering measures.

During the market outreach workshop, industry bodies showed a major interest in protecting customers and educating them on the risks and practices of cryptocurrencies.

Some suggested that a centralised platform for ICOs and other tokens could be implemented for use by the public, allowing regulators to monitor the credibility of token issuers.

Regulators also weighed the advantages of changing current legislation to account for cryptocurrencies against creating new legislation, finding that both had risks and the evolution of cryptocurrency would have to be considered for the successful implementation of either.

The South African Financial Blockchain Consortium further noted the benefits of the underlying blockchain technology behind many cryptocurrencies, stating that it may lead to the dissolution of central banking.

The working group also found that any regulation implemented would have to be technology-neutral and not favour any token.